Gerber et al v. Wells Fargo Bank NA et al

Filing 26

ORDER, that "Wells Fargo Bank, N.A.'s Motion to Dismiss Plaintiffs' Complaint" (Doc. 7) is GRANTED. Plaintiffs' complaint (Doc. 1-1) is DISMISSED without prejudice. IT IS FURTHER ORDERED that Plaintiffs may file an amended complaint by November 2, 2011. If Plaintiffs do not amend by the stated deadline, their case will be dismissed without further notice. Signed by Judge Neil V Wake on 10/19/2011.(KMG)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Duane Gerber, an individual; and TDL Professionals, Inc., a Utah corporation, 10 11 12 13 No. CV 11-01083-PHX-NVW ORDER Plaintiffs, vs. Wells Fargo Corporation, Bank, N.A., a California Defendant. 14 15 16 Before the Court is “Wells Fargo Bank, N.A.’s Motion to Dismiss Plaintiffs’ 17 Complaint” (Doc. 7). For the reasons stated below, the motion will be granted but 18 Plaintiff will receive leave to amend. 19 I. LEGAL STANDARD 20 To state a claim for relief under Fed. R. Civ. P. 8(a), a plaintiff must make “‘a 21 short and plain statement of the claim showing that the pleader is entitled to relief,’ in 22 order to ‘give the defendant fair notice of what the . . . claim is and the grounds upon 23 which it rests.’” 24 omitted). This “short and plain statement” must also be “plausible on its face.” Ashcroft 25 v. Iqbal, 129 S. Ct. 1937, 1949 (2009). A claim is plausible if it contains “[f]actual 26 allegations [sufficient] to raise a right to relief above the speculative level,” Twombly, 27 550 U.S. at 555, and to permit a reasonable inference that the defendant is liable for the 28 conduct alleged, Iqbal, 129 S. Ct. at 1949. “Determining whether a complaint states a Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations 1 plausible claim for relief . . . [is] a context-specific task that requires the reviewing court 2 to draw on its judicial experience and common sense.” Id. at 1950. A proper complaint 3 needs no “formulaic recitation of the elements of a cause of action,” see Twombly, 550 4 U.S. at 555, but the plaintiff must at least “allege sufficient facts to state the elements of 5 [the relevant] claim,” Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1122 (9th 6 Cir. 2008). 7 If a plaintiff alleges a fraud-based cause of action, Fed. R. Civ. P. 9(b) requires the 8 plaintiff to “set forth more than the neutral facts necessary to identify the transaction. 9 The plaintiff must set forth what is false or misleading about a statement, and why it is 10 false.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc). The 11 plaintiff should also allege the identity of the person who made the misrepresentation; the 12 time, place, content, and manner of the misrepresentation; the persons who heard, read, or 13 otherwise received the misrepresentation; and the injury caused by reliance on the 14 misrepresentation. 2 James Wm. Moore et al., Moore’s Federal Practice § 9.03[1][b] (3d 15 ed. 2010). 16 In evaluating a motion to dismiss, courts accept all of the plaintiff’s plausible 17 factual allegations as true and construe the pleadings in a light most favorable to the 18 plaintiff. Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir. 2005). The Court generally 19 does not look beyond the pleadings, but may take judicial notice of matters of public 20 record. Lee v. City of Los Angeles, 250 F.3d 668, 688–89 (9th Cir. 2001). 21 II. BACKGROUND 22 Some time ago, a homeowner in Avondale, Arizona, defaulted on her house 23 payment obligations to Defendant Wells Fargo, which held both the senior lien and a 24 junior lien. The junior lien secured a home equity line of credit. Both liens were 25 properly recorded. 26 At Wells Fargo’s direction, a trustee held a trustee’s sale in August 2010 on the 27 junior lien only, although Wells Fargo had yet to sell the senior lien. The Notice of 28 Trustee’s Sale did not specifically state that the interest for sale was a junior lien, nor did -2  1 it mention the senior lien, but it warned that “[c]onveyance of the property shall be 2 without warranty, express or implied, and subject to all liens, claims or interest having a 3 priority senior to the Deed of Trust. The Trustee shall not express an opinion as to the 4 condition of title.” (Doc. 7-1 at 17.) 5 Plaintiff Duane Gerber was the high bidder for the Avondale junior lien, paying 6 $68,226. Although his complaint does not specifically say so, it appears that he bid under 7 the impression that the interest for sale was a senior lien. The complaint says nothing 8 about whether Gerber performed a title search. Gerber later conveyed his newly-bought 9 interest to his company, TDL Professionals, Inc. The complaint likewise says nothing 10 about whether TDL performed a title search. 11 In January 2011, Wells Fargo noticed a new trustee’s sale for the Avondale 12 property. It appears that this second trustee’s sale was the first Gerber (or TDL) knew of 13 the senior lien, but again, the complaint does not specifically say so. 14 Facing the possibility of losing the $68,000 investment, Gerber and TDL 15 (collectively, “Gerber,” unless the context requires otherwise) filed a complaint in 16 Maricopa County Superior Court claiming that Wells Fargo had engaged in statutory 17 consumer fraud. The Superior Court granted a temporary restraining order against the 18 trustee’s sale, after which Wells Fargo removed to this Court. Wells Fargo then filed the 19 pending motion to dismiss. The Court called for further briefing on whether Restatement 20 (Second) of Contracts §§ 151–58, regarding the doctrine of mistake, has any relevance. 21 The parties submitted supplemental briefs on that issue and the Court heard oral 22 argument on October 6, 2011. 23 III. 24 25 ANALYSIS A. Arizona Consumer Fraud Act 1. Elements of the Cause of Action 26 Gerber alleges that “Wells Fargo has an established pattern or practice of 27 conducting trustee’s sales on junior liens when it also holds a senior lien on the same 28 property. [¶] This practice is done with the intent and hope that unwary customers will -3  1 be deceived and that Wells Fargo will be [sic] receive more than the fair market value of 2 the property.” (Doc. 1-1 ¶¶ 20–21.) Gerber therefore accuses Wells Fargo of fraud under 3 the Arizona Consumer Fraud Act: 4 The act, use or employment by any person of any deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 A.R.S. § 44-1522(A). “Merchandise” here includes “real estate.” Id. § 44-1521(5). The Consumer Fraud Act contains no mention of private remedies, but instead grants enforcement powers to the attorney general. Id. §§ 44-1524 to -1534. In 1974, the Arizona Supreme Court held that the Act provides an implied private right of action to “a person who has been damaged by the practices declared to be unlawful.” Sellinger v. Freeway Mobile Home Sales, Inc., 110 Ariz. 573, 576, 521 P.2d 1119, 1122 (1974). Sellinger did not establish the limits of this private right, except that the claimant must be “a person who has been damaged.” Given that the Act itself applies “whether or not any person has in fact been misled, deceived or damaged,” A.R.S. § 44-1522(A), Sellinger’s interpretation created uncertainty about the scope of a private Consumer Fraud Act claim, and how it differed from common law fraud. The first Arizona Court of Appeals decision to interpret Sellinger added a reliance element, reasoning that reliance is a “prerequisite” to damages. Peery v. Hansen, 120 Ariz. 266, 269, 585 P.2d 574, 577 (Ct. App. 1978). However, Peery further “h[e]ld that the right to rely, though a necessary element in a common law fraud action, is not essential to a statutory fraud action in Arizona.” Id. at 270, 585 P.2d at 578 (emphasis added). Since Peery, the elements of statutory fraud have generally been stated as “a false promise or misrepresentation made in connection with the sale or advertisement of merchandise and consequent and proximate injury resulting from the promise. An injury 28 -4  1 occurs when a consumer relies, even unreasonably, on false or misrepresented 2 information.” Kuehn v. Stanley, 208 Ariz. 124, 129, 91 P.3d 346, 351 (Ct. App. 2004) 3 (footnote and citation omitted). Recognizing that the Act itself prohibits more than just 4 “false promise[s] or misrepresentation[s],” some courts have extended the elements of the 5 cause of action to “‘concealment, suppression or omission’ of any material fact.” Maurer 6 v. Cerkvenik-Anderson Travel, Inc., 181 Ariz. 294, 297, 890 P.2d 69, 72 (Ct. App. 1994) 7 (quoting A.R.S. § 44-1522(A)). 8 9 The foregoing statements of elements do not incorporate every form of deception prohibited by the Consumer Fraud Act. For example, the Act prohibits “false 10 pretense[s]” and “false promise[s],” A.R.S. § 44-1522(A), but courts have not mentioned 11 these form of deception when setting forth the elements of the private right. Nonetheless, 12 there is no basis in precedent or reason to assume that the private right of action 13 encompasses only some of the forms of deception described in the Act. Accordingly, 14 making room for every form of deception described in the Act, the elements of statutory 15 consumer fraud in Arizona are as follows: 16 1) a deception, deceptive act or practice, fraud, false pretense, false promise, 17 misrepresentation, or concealment, suppression or omission of any material 18 fact with intent that others rely upon such concealment, suppression or 19 omission; 20 2) made in connection with the sale or advertisement of any merchandise; 21 3) on which the claimant relied, even if unreasonably; 22 4) which caused claimant’s damages. 2. 23 Gerber’s Complaint Compared to Elements of Cause of Action 24 For purposes of this motion, there is no reasonable dispute regarding the second 25 and fourth elements — i.e., that Wells Fargo’s allegedly deceptive acts were made in 26 connection with the sale of “merchandise” (real estate), and that Gerber’s damages flow 27 from the alleged deception. This analysis therefore examines only the first and third 28 elements. -5  a. 1 First Element: Deception 2 In the residential real estate context, it is usually economically foolish to buy a 3 junior lien subject to a senior lien because the junior lien is usually worthless. One who 4 puts a worthless lien up for sale — as Wells Fargo allegedly did — is therefore bound to 5 raise suspicions. 6 At oral argument, Wells Fargo offered what was represented as a benign 7 explanation. First, Wells Fargo insisted that a junior lien has real value because a party 8 buying a junior lien can reinstate the primary mortgage under A.R.S. § 33-813(A). That 9 statute grants “any person having a subordinate lien” the right to “reinstate [the loan 10 securing the senior lien] by paying . . . the entire amount [in arrears],” and by paying the 11 expenses the trust beneficiary incurred to protect its interest. Second, Wells Fargo’s 12 home equity division usually gets the short end of the stick when the mortgage division 13 (which operates separately) sells its senior interest first, because those sales almost 14 always result in a credit bid, leaving nothing for the junior interest. Therefore, Wells 15 Fargo sometimes permits the home equity division to go first. 16 Wells Fargo’s explanation at oral argument is not evidence and Wells Fargo is not 17 necessarily bound by it. To the extent it is true, it does not dispel any suspicions. 18 Admitting that the home equity division gets the short end of the stick when the home 19 mortgage division goes first simply emphasizes that junior liens are usually worthless — 20 generally contradicting the assertion that one who buys a junior lien has bought 21 something of real value. Yes, the right to reinstate has theoretical value, but no practical 22 value if the senior lien is undersecured — as is usually the case in the Phoenix metro area 23 today. 24 No located authority addresses whether Wells Fargo’s alleged conduct is a 25 deceptive practice for Consumer Fraud Act purposes. The closest Arizona case appears 26 to be Cearley v. Wieser, 151 Ariz. 293, 727 P.2d 346 (Ct. App. 1986), which affirmed a 27 jury award under the Consumer Fraud Act where the defendant attempted to assign his 28 liquor license knowing that the law would not permit an assignment. Cearley supports -6  1 the general principle that offering for sale something the seller knows to be worthless is a 2 deceptive act. 3 A New Jersey case brought in the early 1970s under a consumer fraud statute 4 materially identical to Arizona’s is also informative, despite the separation in time and 5 distance. See Kugler v. Haitian Tours, Inc., 293 A.2d 706 (N.J. Super. Ch. 1972) 6 (applying N.J. Stat. § 56:8-2). 7 creating a market for travel packages to places where New Jersey couples could obtain a 8 divorce more easily. One company began advertising “Haitian divorce” packages. The 9 validity of a divorce granted in Haiti was highly questionable, despite principles of 10 international comity, and the company therefore 11 refrain[ed] from expressing any view of the validity of Haitian divorces in New Jersey, [did] not say that they are valid, and as a matter of policy recommend[ed] that customers who want[ed] an opinion as to validity seek the advice of their own counsel. . . . [T]he papers [also bore] the legend: ‘Consult your attorney.’ 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Divorce laws in New Jersey were more strict then, Id. at 710. The New Jersey Court nonetheless concluded that the company was perpetrating “a fraud upon the purchasers, for the divorces they obtain are, for all practical purposes, worthless and do not accomplish the purpose for which they are purchased.” Id. Whether the junior lien offered by Wells Fargo is also, “for all practical purposes, worthless and do[es] not accomplish the purpose for which [it was] purchased,” depends on whether the value of the home continues to secure the senior lien. If not, then the only bidders the lender can expect are those who misperceive what they are bidding for. Accordingly, if a trust beneficiary possesses both the junior and senior lien, and if the beneficiary knows or should know that the collateral no longer fully secures the senior lien, then intentionally causing the trustee to place the junior lien up for sale first is an inherently “deceptive act” and creates a “false pretense” under the Consumer Fraud Act — the pretense that the sale has a good faith economic purpose, and is not simply designed to catch a fool. 28 -7  1 Gerber’s complaint does not adequately allege facts to support such deception. 2 His complaint implicitly invites the reader to assume that the senior lien was 3 undersecured, and it would be a surprise if the case were otherwise in this real estate 4 market. But the possibility remains that the collateral continued to hold sufficient value. 5 If so, Wells Fargo did not necessarily behave deceptively. Gerber’s complaint will 6 therefore be dismissed with leave to amend, to allege sufficient facts.1 7 Wells Fargo nonetheless requests dismissal with prejudice because the trustee’s 8 sale notice stated that the winning bidder would receive the property “subject to all liens, 9 claims or interest having a priority senior to the Deed of Trust. The Trustee shall not 10 express an opinion as to the condition of title.” This is boilerplate inserted by the trustee 11 largely for its own protection. See A.R.S. § 33-811(E) (“The trustee’s deed [conveys 12 title] . . . subject to all liens, claims or interests that have a priority senior to the deed of 13 trust.”). If it somehow protects Wells Fargo, it does not shield it from liability for 14 deceptive acts. Attempting to sell a worthless interest is itself a deceptive practice, and 15 warning prospective buyers that the interest might be worthless does not dispel the 16 deception.2 Because Wells Fargo held both the junior and senior liens, it can be liable for 17 deceptive practices — regardless of the disclaimer — if it knew or should have known 18 that the senior lien was undersecured but intentionally auctioned the junior lien first. b. 19 Third Element: Reliance 20 The implied private action under the Consumer Fraud Act requires reliance, 21 although it need not be reasonable. Unreasonable reliance exists where a party does not 22 have actual knowledge of the deception, but should. Peery, 120 Ariz. at 270, 585 P.2d at 23 1 24 25 26 27 Public records can provide much of the necessary data. To the extent they do not (e.g., if the amount still owing on the loan secured by the senior lien is not publicly available), public records usually suffice to provide the “information and belief” necessary to support a plausible inference. 2 The Court expresses no opinion about a notice of trustee’s sale that specifically warns of an undersecured senior lien. 28 -8  1 578. Accordingly, if Gerber actually knew about Wells Fargo’s senior lien, he cannot 2 establish reliance and his cause of action fails.3 But if he had no actual knowledge, he 3 can establish reliance even if he should have known. 4 Gerber alleges nothing about reliance. This omission matters because Gerber 5 cannot maintain a claim if he had actual knowledge of the senior lien. His complaint will 6 therefore be dismissed, but with leave to amend with specifics about what he knew or did 7 not know, including what Gerber’s and TDL’s title companies told them (if they hired 8 title companies). 9 Wells Fargo, however, again requests dismissal with prejudice, arguing that 10 Gerber had actual notice as a matter of law because the recording statute, A.R.S. § 33- 11 416, states: “The record of a grant, deed or instrument in writing authorized or required to 12 be recorded, which has been duly acknowledged and recorded in the proper county, shall 13 be notice to all persons of the existence of such grant, deed or instrument . . . .” But 14 “recording acts are not intended as a protection for fraudulent liars.” 15 (Second) of Torts § 540 cmt. b (1977). 16 misrepresentation of fact” — here, the false pretense of rational economic value — “is 17 justified in relying upon its truth, although he might have ascertained the falsity of the 18 representation had he made an investigation.” Id. § 540; see also Carrel v. Lux, 101 Ariz. 19 430, 435–36, 420 P.2d 564, 569–70 (1966) (adopting the first Restatement’s 20 corresponding section). Accordingly, recording a deed does not defeat reliance and does 21 not provide a basis to dismiss Gerber’s complaint with prejudice. 3. 22 23 24 25 26 27 Restatement Rather, one who receives “a fraudulent Rule 9(b) Analysis Wells Fargo generally challenges Gerber’s complaint under the Rule 9(b) fraudpleading standard. Although Gerber has not adequately pleaded a deceptive act or 3 Traditional tort law classifies actual knowledge of deception as a form of unreasonable reliance, Restatement (Second) of Torts § 541 (1977), but Arizona courts treat actual knowledge as lack of reliance, rather than unreasonable reliance, Cearley, 151 Ariz. at 295, 727 P.2d at 348; Peery, 120 Ariz. at 269–70, 585 P.2d at 577–78. 28 -9  1 reliance, his complaint is not otherwise defective under Rule 9(b). He has alleged the 2 identity of the person who made the alleged misrepresentation (Wells Fargo, acting 3 through a trustee); the time, place, content, and manner of the misrepresentation (the 4 Notice of Trustee’s Sale and the sale itself in August 2010); the persons who heard, read, 5 or otherwise received the misrepresentation (by necessary implication, Gerber himself 6 must have learned of the trustee’s sale); and the injury caused by reliance on the 7 misrepresentation (the potential loss of $68,000). See 2 James Wm. Moore, Moore’s 8 Federal Practice § 9.03[1][b] (3d ed. 2010). Therefore, Gerber’s complaint otherwise 9 satisfies Rule 9(b). 10 B. Mistake 11 This Court called for further briefing on whether the doctrine of mistake has any 12 bearing on the current situation. Given the foregoing, the existence and scope of a 13 mistake/avoidance remedy need not be addressed at this time. 14 C. Standing 15 Wells Fargo challenges Plaintiffs’ standing. The alleged wrong, says Wells Fargo, 16 was perpetrated on Gerber, not TDL, yet only TDL has a continuing economic stake in 17 the transaction. Technically speaking, Wells Fargo is correct. As alleged, TDL has a 18 claim against Gerber, and Gerber has a third-party claim against Wells Fargo. But 19 Gerber describes TDL as “his company” (Doc. 1-1 ¶ 11), so it is understandable that he 20 does not want to litigate in such a posture. 21 All of the policy reasons underlying standing doctrine — e.g., a stake in the 22 outcome to sharpen the issues — would undoubtedly be satisfied in the current posture. 23 However, Gerber has offered “to amend the Complaint to reference an assignment of the 24 tort claim from Plaintiff Gerber to Plaintiff TDL.” (Doc. 9 at 7.) Given that Gerber will 25 receive an opportunity to amend for substantive reasons, he may also amend to establish 26 an assignment giving TDL the right to pursue the claim. 27 28 - 10   1 IT IS THEREFORE ORDERED that “Wells Fargo Bank, N.A.’s Motion to 2 Dismiss Plaintiffs’ Complaint” (Doc. 7) is GRANTED. Plaintiffs’ complaint (Doc. 1-1) 3 is DISMISSED without prejudice. 4 IT IS FURTHER ORDERED that Plaintiffs may file an amended complaint by 5 November 2, 2011. If Plaintiffs do not amend by the stated deadline, their case will be 6 dismissed without further notice. 7 Dated this 19th day of October, 2011. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 11  

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